Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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The quantity, the distribution in the network and the proper functioning of the instruments for measuringthe key process parameters (e.g. the water flow and/or water quality and the meters for the final users)have to be assessed. This is one of the most important parts of the feasibility analysis 32 .Option analysisThe analysis should include a comparison with:- the current situation (the ‘business as usual’ scenario);- the possible alternatives within the same infrastructure, for example: different location of wells,alternative routes for aqueducts or trunk lines, different building techniques for dams, differentpositioning and/or process technology for plants, utilisation of different energy sources fordesalination plants, etc.;- the possible alternatives of sewage drains (lagoons, different receptors, etc.);- the possible global alternatives, for example: a dam or a system of crosspieces instead of a wells field orthe agricultural re-utilisation of properly treated sewage, a consortium depurator instead of several localdepurators, etc.The analysis of the design alternatives must always be consistent with the investment category (see‘Typology of the investment’). In the literature it is possible to find extensive references for the varioustypes.In selecting the options, the constraints arising because of the legislative framework (EU acquis), and inparticular, from the European policy on water (see above) have to be taken into account. In addition, thedesign alternatives to be evaluated must meet the water sector programmes (planned of use of watersources, programme of construction of new water infrastructure, rules of management of water services,plan of waste water disposal and/or re-use, etc.) of the Member State. Options that respect both designalternatives and the policy constraints detailed above, will then be ranked using financial and economicconsiderations according to the methodology developed in section 2.3.3.3.2.2.3 Financial analysisThe financial inflows and outflows are:Financial inflows• Tariffs or fees applied for the water services• Possible reimbursements for the collection andtransport of rainwater• Possible proceeds for the sale of water in case of reuse• Prices of any additional service the utility may offer tothe user (for example hooking up, periodicmaintenance, etc.)Financial outflows• Investment costs- Land acquisition- Works- Equipments- Legal fees- Start-up costs• Operating costs- Energy- Materials- Services- Technical and administrative personnel costs- Maintenance costsThe time horizon for project analysis is usually 30 years.32For example, instruments designed for an aqueduct or a water supply network should allow the calculation of the water balance at differenttime scales (annual, monthly, daily, etc.) during operation. Instruments designed for a sewerage and a wastewater treatment plant should allow theverifying of both the wastewater collected and treated and the the quality of water discharged into the receiving water body.98
One of the most important aims of the financial analysis in the water services sector is to demonstrate thelong term financial sustainability of the project.In the case of a PPP project, the financial analysis should show how the improved financial performanceof the project, as allowed by the EU grant, is shared between the public and the private partner of thePPP. This depends precisely upon the amount of public and private funding and how the charges (andrisks) of future management are broken down among the partners of the PPP.After a consolidated financial analysis, the above mentioned issue could be addressed, for example, bycalculating an FRR(K g ) and an FRR(K p ), respectively for the public and the private investor. To computethese performance indicators it is sufficient to change the capital outlays in the FRR(K) or FNPV(K)calculation accordingly (for an application see the water waste case study in Chapter 4).For the outflow, the purchasing price of the products and services, necessary for both the operation of theplant and the additional services supplied, should be considered. Since water infrastructures are generallycharacterized by a long period of useful life, the financial analysis should consider the residual value of theinvestment, according to the methods, that were described in the second chapter of the Guide.3.2.2.4 Economic analysisThe benefits and economic costs of projects in the water supply and waste water treatment sector have tobe identified on a case-by-case basis, as they are strongly related to the type of investment and servicesoffered, which in this sector show a very large variability with respect to the project objectives, the uses ofwater, the prevailing type of investments, etc. (see project identification). In any case, according to theaforementioned Directive 2000/60/EC, the analysis must both the costs and benefits arising to the users,and the costs and benefits arising for the water resource itself, and for the environment in general, have tobe taken into account.The main benefits can be identified as follows with respect to the type of project and its objectives:a) Water supply projects, with the aim of increasing the quantity and / or the reliability of water supply for civilian uses,irrigation and industrial purposes.The main social benefit in the economic analysis may be evaluated according to estimates of expecteddemand for water resources that the investment will satisfy. In other words the benefit is equal to thewater demand satisfied by the project and not satisfied in the do-nothing alternative, suitably valued.The water service is a classic case of natural monopoly. Market prices generally suffer considerabledistortions. The basis for the estimation of an accounting price for water may be the user’swillingness-to-pay for the service 33 .The willingness-to-pay (WTP) can be estimated empirically by applying the market prices ofalternative services (tank trucks, bottled drinking water, distribution of drinks, purification by meansof devices installed by the users, in situ sanitary processes for potentially infected waters, etc.). Inother words, the social benefits of the water service can be evaluated by considering the bestalternative technique feasible for the supply of the same catchments area (backstop technology) andby quantifying the price of the alternative service.Otherwise, a conversion factor (CF) may be applied to the revenues deriving from the water service,realised or improved by the project. The CF is based on a planning parameter, that can be defined, asan example, by calculating the mean value between the willingness-to-pay (see above) and the longterm marginal cost of the service and adjusting the result in order to take into account the distributiveeffects. This method must be used with caution and only in cases where it is not possible to33Alternatively, for any water infrastructure meant for the service of industrial or agricultural areas, it is possible to evaluate the added value ofthe additional product, that has been gained through the water availability. But the adequacy of this approach for determining the economicbenefits must be carefully evaluated on a case-by-case basis.99
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ACRONYMS AND ABBREVIATIONSBAUB/CCBA
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TABLESTable 2.1 Financial analysis
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FIGURESFigure 1.1 Project cost spre
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Cohesion Fund, and through the leve
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or the plant will not reveal excess
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CHAPTER ONEPROJECT APPRAISAL IN THE
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Some specifications for financial t
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FOCUS: INFORMATION REQUIREDGeneral
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In particular, CBA results should p
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CHAPTER TWOAN AGENDA FOR THE PROJEC
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objectives, are, as far as possible
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considered the appropriate shadow p
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2.3.2 Feasibility analysisFeasibili
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This approach will be presented in
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Current assets include:- receivable
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The following items are usually not
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Mainly, the examiner uses the FRR(C
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The dynamics of the incoming flows
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eturn on their own capital (Kp). Th
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While the approach presented in thi
Page 48 and 49: 2.5.1 Conversion of market to accou
Page 50 and 51: Table 2.9 Electricity price dispers
Page 52 and 53: 2.5.1.2 Fiscal correctionsSome item
Page 54 and 55: previously estimated in projects wi
Page 56 and 57: FOCUS: ENPV VS. FNPVThe difference
Page 58 and 59: 2.6 Risk assessmentProject appraisa
Page 60 and 61: Table 2.14 Impact analysis of criti
Page 62 and 63: Figure 2.6 Probability distribution
Page 64 and 65: eneficiary. The project proposer sh
Page 66 and 67: There are many ways to design an MC
Page 68 and 69: PROJECT APPRAISAL CHECK-LISTCONTEXT
Page 70 and 71: - reduction of congestion by elimin
Page 72 and 73: - the methods applied to estimate e
Page 74 and 75: - the marginal external costs: cong
Page 76 and 77: - the benefits for the existing tra
Page 78 and 79: The following tables show some refe
Page 80 and 81: 3.1.1.6 Risk assessmentDue to their
Page 82 and 83: As shown in Figure 3.1, only under
Page 84 and 85: 3.1.3.7 Other project evaluation ap
Page 87 and 88: - Waste Management Hierarchy rules
Page 89 and 90: The time horizon for a project anal
Page 93 and 94: every user support the total costs
Page 95 and 96: Territorial reference frameworkIf t
Page 97: Cycle and phases of the projectGrea
Page 101 and 102: projects, as in other sectors in wh
Page 103 and 104: 3.2.3.2 Project identificationBasic
Page 107 and 108: In order to evaluate the overall im
Page 109 and 110: for regassification plants, number
Page 111 and 112: Examples of objectives are:- change
Page 113 and 114: decontamination if any;- the techni
Page 115 and 116: 3.3.3.6 Risk AnalysisCritical facto
Page 117 and 118: 3.3.4.6 Risk assessmentCritical fac
Page 119 and 120: 3.4.1.5 Economic analysisThe follow
Page 121 and 122: Financial inflows• Admission fees
Page 123 and 124: expectancy suitably adjusted by the
Page 125 and 126: The time horizon for project analys
Page 127 and 128: A Cost-Benefit Analysis should cons
Page 129 and 130: CHAPTER FOURCASE STUDIESOverviewThi
Page 131 and 132: - finally, there is the traffic tha
Page 134 and 135: c) Road users producer’s surplus:
Page 136 and 137: 4.1.5 Scenario analysisTwo scenario
Page 138 and 139: The financial performance indicator
Page 140 and 141: Table 4.10 Economic analysis (Milli
Page 142 and 143: Table 4.12 Financial return on capi
Page 144 and 145: 4.2 Case Study: investment in a rai
Page 146 and 147: 4.2.4 Economic analysisThe benefits
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Financial investment costs have bee
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Figure 4.6 Results of the risk anal
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Table 4.22 Economic analysis (Milli
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Table 4.24 Financial return on capi
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4.3 Case Study: investment in an in
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ate of 0.6% per year is assumed for
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The shadow price of the CO 2 avoide
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As a result, the probability distri
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Table 4.36 Financial return on capi
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16 17 18 19 20 21 22 23 24 25 26 27
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4.4 Case Study: investment in a was
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4.4.2 Financial analysisAlthough in
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THE CALCULATION OF REVENUESReferrin
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0.15 m 3 /m 2 a depreciation of 20%
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As result, the probability distribu
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Figure 4.13 Probability distributio
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Table 4.48 Financial return on nati
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Table 4.50 Financial return on priv
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16 17 18 19 20 21 22 23 24 25 26 27
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4.5 Case Study: industrial investme
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4.5.4.1 Investment costsThe total i
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Finally, a residual value was estim
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This analysis shows the need to pay
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Table 4.62 Financial return on inve
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Table 4.64 Return on private equity
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Table 4.66 Economic analysis (thous
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ANNEX ADEMAND ANALYSISDemand foreca
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The method applied for the forecast
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Furthermore, travel demand depends
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This Guide supports a unique refere
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A higher discount rate for countrie
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Figure C.1 Project ranking by NPV v
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The main problems with this indicat
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EXAMPLE OF SHADOW WAGE IN DUAL MARK
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Another exhaustive way to include d
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Figure E.2 Percentage of low income
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ANNEX FEVALUATION OF HEALTH &ENVIRO
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Figure F.1 Main evaluation methodsS
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- expenditure on capital equipment
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due to air pollution or water conta
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BENEFIT TRANSFER - SELECTED REFEREN
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ANNEX GEVALUATION OF PPP PROJECTSIt
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adjustments for Competitive Neutral
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ANNEX HRISK ASSESSMENTIn ex-ante pr
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Reference ForecastingThe question o
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Figure H.5 Levels of risks in diffe
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ANNEX IDETERMINATION OF THE EU GRAN
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A.4. Technological Alternatives and
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GLOSSARYAccounting period: the inte
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Market price: the price at which a
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BIBLIOGRAPHY1. ReferencesBelli, P.,
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Ray, A. 1984, Cost-benefit analysis
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EnvironmentGeneralAtkinson, G., 200
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European Commission, DG Tren, 2003,
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Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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